Good morning,
Keep Carney and Carry on
In a classic example of keeping ones powder dry, the Bank of England declined the opportunity to cut interest rates yesterday, surprising the majority of market commentators and economists. We had thought it wise for them to do so for a number of reasons.
We know that the Monetary Policy Committee has little appreciation for negative interest rates and their negative effects on bank funding models so, in essence, thy only have 50bps of ammunition in their arsenal and we, for the moment at least, have very little knowledge or certainty as to the size of the task it will have to work against.
We have had almost no post-Brexit data and while inflation may move higher courtesy of a weaker pound and growth will likely take a hit, what is a 25bps cut going to do in the short term? Carney and the MPC have never been fans of acting for acting’s sake despite being one of the strongest advocates of financial disruption as a result of a vote for Brexit.
Wait on next month
A Super Thursday meeting in August provides far better infrastructure for action in that we will be given the Bank’s latest Inflation Report – festooned with fresh inflation and growth projections – as well as a press conference that will allow for a full and thorough explanation of the Bank’s decision. We will have received at least some output data by then and that may allow the Bank to more accurately target growth boosting measures to specific industries.
Caveats exist given the absence of concrete output data but we could easily see a 0.25% cut in August alongside an expansion of asset purchases by £50bn although a month’s extra thinking time may allow for more imaginative fixes such as credit easing for UK corporates. It will also allow for closer conversation with the May government on a monetary and fiscal policy one-two punch of stimulus.
GBP having its best week since 2009
Sterling leapt higher on the announcement needless to say and is on course for its best week since 2009. There is an overwhelming amount of expectation that GBP is overly high now and that any prescribed action from the Bank of England next month will take the pound lower. There is of course a small chance that the Bank of England does not feel the need to actually loosen policy at all; that growth and inflation will remain on track to hit target in the coming months and that uncertainty in the markets can be dealt with via a Mario Draghi-esque “whatever it takes” pledge.
I don’t think it happens but is a note of caution to the overwhelming calls for sterling downside in the short term.
China pulls growth from somewhere
Overnight news from China has been altogether rather positive, boosting risky assets and resource sensitive currencies. China’s economy grew by 6.7% in Q2 with property and government spending the main drivers of output. Fixed-asset investment was one sour note to the release and while 9% growth is a fairy tale to us here in the western world, it is the slowest pace since 2000.
There were also gains in more recent industrial production and retail sales announcements.
The Day Ahead
A lot of focus will rightfully land on the latest terrorist attack in France overnight and the likely response from the Hollande government. In structured economic data, we have the latest iterations of US retail sales, inflation and consumer confidence.
Have a great day and a better weekend.